Landorf v. United States

• Decision Date: 14 March 1969
• Docket Number: No. 44-67.,44-67.
• Citation: Landorf v. United States, 408 F.2d 461, 187 Ct.Cl. 99 (Fed. Cl. 1969)
• Parties: Lillian LANDORF and William M. Landau, as Surviving Executors of the Last Will and Testament and Codicil Thereto of Sam Landorf, Deceased v. The UNITED STATES.
• Court: U.S. Claims Court

408 F.2d 461 (1969)

Lillian LANDORF and William M. Landau, as Surviving Executors of the Last Will and Testament and Codicil Thereto of Sam Landorf, Deceased v. The UNITED STATES.

No. 44-67.

United States Court of Claims.

March 14, 1969.

Robert E. Fischer, New York City, attorney of record, for plaintiffs. Robert K. Ruskin and Lowenthal, Ruskin, Landau & Fischer, New York City, of counsel.

Edna G. Parker, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION

LARAMORE, Judge.

This is an estate tax case. Plaintiffs, Lillian Landorf and William M. Landau, are the surviving executors of the last will and testament of Sam Landorf,¹ a resident of New York City, who died on January 8, 1963. The facts have been stipulated and in summary are as follows:²

Sam Landorf and Company, Inc., a New York corporation with its principal offices in New York City, was engaged in the manufacture and sale of children's clothing. At his death, decedent was a stockholder and president of the corporation. He held 500 shares of the outstanding Class A common (voting) stock and William Glottstein, executive vice-president of the corporation, held the remaining 500 shares of Class A common stock. The outstanding shares of Class B common (non-voting) stock were held by decedent's wife, Lillian, and his two sons.

Effective November 9, 1959 (several years before Mr. Landorf's death), the United States Life Insurance Company issued a non-contributory group life insurance policy to the company. It provided, in part, that the corporation would pay monthly premiums for insurance on the lives of designated classes of employees. The amount of the premium was based on the cost of one-year term insurance for each employee covered. Coverage was provided for a one-year period with the right of the corporation, as policyholder, to renew the insurance for another year, subject, of course, to minimum employee participation requirements. Each employee received a "certificate" to evidence his participation in the plan. The policy did not have any cash surrender or loan value.

Decedent, a corporate officer, received a certificate of participation (sometimes referred to as a policy). He designated his wife as the beneficiary of his $200,000 policy coverage.

As originally issued, the policy provided that "this policy and benefits hereunder are `non-assignable'". On December 7, 1960, approximately one year after the policy was issued and two years before decedent died, the policy was amended by an agreement between the insurance company and the policyholder, Sam Landorf Company, Inc. Decedent signed the agreement on behalf of the corporation, as its president. This agreement declared the original non-assignment provision null and void, and substituted a new provision which reads, in part:

This policy is further amended to provide that no assignment of the policy or the benefits thereunder shall be binding upon the Company unless in writing and until it is filed with the Company\'s Home Office in New York, N. Y. The Company assumes no responsibility for the validity of any assignment.

On March 1, 1961, some three months later, decedent executed the insurance company's form titled "Absolute Assignment of Insurance Under the Group Policy" and thereby gratuitously assigned the policy to his wife. It provided that Sam Landorf

designates as beneficiary and assigns, transfers and sets over the insurance on his life provided under the above numbered group policy, together with all additional insurance that may be provided in the future and together with all rights, all sum or sums of money, interest, benefits and advantages whatsoever in connection therewith now due or hereafter to become due to the undersigned by virtue thereof unto Lillian Landorf (hereinafter called the assignee).

The form also states that the insurance company "does not guarantee the validity of any assignment." Six days later, the assignment form was countersigned by an officer of the insurance company, and thereafter it was filed in the insurance company's home office. At no time, however, did the insurance company challenge the validity of the assignment.

In the years prior to his death, the decedent made gifts of money and insurance to his wife and son.³ None of these other policies was a group policy, and none of the proceeds of these policies is involved in this suit.

On December 17, 1962, decedent was examined by his physician and he was found to be in good health. Soon thereafter, he and his wife left for a vacation cruise during which he suffered a coronary thrombosis and died. He did not have a prior history of heart disease.

Mrs. Landorf, as beneficiary, received the $200,000 proceeds of the group policy from the insurance company. The executors of the estate, however, excluded the proceeds from the decedent's gross estate subject to Federal estate taxes. Upon audit, the District Director of the Internal Revenue Service did include the proceeds in the taxable estate (on the basis of sections 2035 and 2042 of the Internal Revenue Code, as amended), and a deficiency was assessed.

Plaintiffs paid the $28,000 deficiency (plus $3,118.67 interest) on February 8, 1966. On March 15, 1966 plaintiffs filed a claim for refund of this payment on behalf of the estate. More than six months elapsed without any action by the District Director, and in February, 1967, plaintiffs commenced this suit (pursuant to section 6532(a) (1)).⁴

Basically, plaintiffs argue that the decedent was neither a legal nor equitable owner of the policy at the time of his death because he had irrevocably and absolutely assigned to his wife his entire title to, and his interest and rights in, both the policy and the proceeds, at a time when he was 60 years of age, in excellent physical health and without any prior history of serious illness. At the time of his death, therefore, he did not have any incident of ownership in the policy, nor had he assigned the policy in contemplation of his death.

Several aspects of this case involve issues of first impression. We decide only those questions raised by the parties and only those that are essential to our conclusion. On the basis of the specific facts before us, we conclude that plaintiffs are entitled to recover a refund.

I. Section 2042

Under section 2042(2), life insurance proceeds receivable by any beneficiary other than his executor are includible in the decedent's gross estate, if immediately prior to his death he possessed any incident of ownership exercisable either alone or in conjunction with another person.⁵ Treasury Regulation section 2042-1(c) (2) repeats almost verbatim the legislative history of section 2042,⁶ and explains the term of art "incidents of ownership" as follows:

For purposes of this paragraph, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. Similarly, the term includes a power to change the beneficiary reserved to a corporation of which the decedent is sole stockholder.

The group policy in this case gave each insured employee the right to designate a beneficiary; the right to elect among optional modes of settlement (to be agreed upon by the insured and the insurance company); the power to assign the policy; and in the event of termination for any reason, the right to convert the group coverage into an individual life insurance policy of equal amount, without providing evidence of insurability. Defendant argues that, in addition to these rights, decedent had a right to surrender or cancel the group policy and also that he had a reversionary interest in the policy in excess of five percent of the value of his policy. Defendant argues that if, despite a transfer of all of his rights in the policy, the decedent nevertheless retained any one of these incidents of ownership, either because applicable local law proscribes the assignment of a particular right or for any other reason, all of the proceeds of the policy are includible in the taxable gross estate.

(a). Right to convert the term insurance to ordinary life insurance

The problems raised by the Federal estate tax consequences of an absolute, written assignment of all rights in a group life insurance policy have been considered by many commentators.⁷ These same problems, however, have not been resolved by Congress, and they have been considered by very few courts.

In the Supreme Court's most recent decision in this area, Commissioner of Internal Revenue v. Noel's Estate, 380 U.S. 678, 85 S.Ct. 1238, 14 L.Ed.2d 159 (1965), it held the proceeds of flight insurance includible in the decedent's estate and rejected the wife's contention that the decedent had assigned the policies to her immediately prior to the flight which proved fatal to her husband. The Court found that a true assignment had not been made. Mrs. Noel paid for the insurance and received the policies from the sales clerk. The Court, however, noted that the contract terms stated that the policies could not be assigned without a written endorsement by the company and none was made. The Court concluded:⁸

Nothing we have said is to be taken as meaning that a policyholder is without power to divest himself of all incidents of ownership over his insurance policies by proper gift or assignment, so as to bar its inclusion in his gross estate under § 2042(2). What we do hold is that no such transfer was made of the policies here involved. * *

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